The farm-retail price spread revisited: A general equilibrium perspective
Abstract
The aggregate farm-retail price spread is one of the more frequently quoted agricultural indices. The purpose of this thesis is to determine how economic growth and imperfect competition in domestic food manufacturing affects the farm-retail price spread. The analysis of economic growth considers the impact of an increase in income, accomplished by an increase in factor endowments, and neutral technical change. At this stage in the analysis: all markets are assumed to be perfectly competitive. A five percent increase in the dometic capital endowment led to a 1.72 percent decrease the farm-retail price spread, while the same increase in the domestic labor endowment caused a 1.85 percent increase in the spread. This differential is due to the Rybczynski effect. As a result, it matters how additional income is generated. Neutral technical change in the domestic economy, except in the agricultural sector, has little impact on the farm-retail price spread. A one percent rate of neutral technical change in domestic agriculture caused a 2.15 percent reduction in the price spread. This decrease is due to a change in the consumption mix of domestic food products that caused the overall price of food to decrease by more than agricultural prices. The effect of imperfect competition in domestic food manufacturing on the farm-retail price spread depends on two key points. First, the technology in the imperfectly competitive industries plays a very important role. Five imperfectly competitive industries are identified and these industries use a relatively small amount of agricultural inputs. Thus, any changes in input demand by these industries does not have a large impact on the derived demand for agricultural products. Second, the ability of consumers to substitute among food products determines the direction of change in the farm-retail price spread. If consumers can easily substitute among food products, the price spread decreases. The general equilibrium approach in this thesis can be usefully applied as a framework for organizing future research at the retail, farm and/or food manufacturer level. This approach has three important benefits. First, this framework is flexible enough to incorporate existing and new information on technology, consumer preferences and pricing behavior as it becomes available. As a result, it enables one to isolate what is, and what is not important for a particular issue. Third, the applied general equilibrium approach requires one to take a broader perspective than does traditional partial equilibrium analysis. This is increasingly important as U.S. agriculture becomes more integrated in the global economy.
Degree
Ph.D.
Advisors
Hertel, Purdue University.
Subject Area
Agricultural economics
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